New Guinea, geographically as well as historically, is Australia's closest relative. Separated from the mainland during the last glacial period, the waters filled in what now separates them: 150km of the Torres Strait.

Despite being endowed with enviable mineral stores, economic and political exploitation has left New Guinea housing many of the poorest people on earth - particularly in the western half of West Papua.

As it moved towards independence from the Dutch, the international community neglected West Papua in order to realise a business deal between US mining company Freeport-McMoRan Copper & Gold ["Freeport"] and Suharto - at the time a general in the Indonesian army.

The deal granted a jointly owned company, PT Freeport Indonesia ["Freeport-Indonesia"], full rights to prospect a 'mountain of ore' now known as the Grasberg complex. In return, Indonesia would derive significant tax revenues and fees, as well as a minority 9.36 per cent shareholding.

Observing the Grasberg mine via Google Earth, one sees a scar on the earth like no other: located four thousand metres above sea-level, open-pit (above ground) mining has bored a hole through the top of the mountain a kilometre wide. What they're digging for is more than US$40 billion worth of copper and gold. Every day, the operation discharges 230,000 tonnes of tailings (waste rock) into the Aghawagon River below. This process is expected to continue for a further six years, at which point, exploration will go underground until there's no value left. Freeport estimates they'll be done by 2041.

Now recognised as one of the most corrupt and tyrannical leaders in history, President Suharto renewed Freeport-Indonesia's exclusive mining rights in 1991 for a further 30 years with an option of two ten year extensions. The licence included an option to prospect another 2.6 million-hectares, as far as the Papua New Guinea border.

Enter Rio Tinto

In February 1995, Rio Tinto announced deals that secured access to Grasberg. First, they agreed to invest US$500 million of new capital in Freeport for a 12 per cent stake in the US mining business.

Second, Rio Tinto agreed to finance a US$184 million expansion of the Grasberg mine. In return, they received 40 per cent of post-1995 production revenue that exceeded certain output targets, and from 2021 a 40 per cent stake in all production. in addition, Rio Tinto would receive 40 per cent of all production from new excavations elsewhere within West Papua.

By October 1995, an independent US government agency had cancelled Freeport's international political risk insurance. The insurer, Overseas Private Investment Corporation, specifically cited the Grasberg mine operation as contravening the Foreign Assistance Act of 1961, which required that "overseas investment projects do not pose unreasonable or major environmental hazards or cause the degradation of tropical forests".

"Freeport was incurring annual costs of $5 million for government-provided security ... and fluctuating annual costs reaching $12 million for unarmed, in-house security"

As Suharto's reign came to an end, an increasing number of West Papuans also began to campaign against the environmental and social impact of Grasberg. Papuan leaders brought the matter before the US Federal District Court in April 1996 and later the Subcommittee on International Operations and Human Rights of the US House of Representatives in May 1999.

Then, in August 2002, two American teachers and an Indonesian employed by Freeport-Indonesia were murdered at the Grasberg mine complex. Following one rebel's admission that he was a business partner of the Indonesian military, a revelation that might violate the Foreign Corrupt Practices Act, it was later revealed that Freeport was incurring annual costs of $5 million for government-provided security of the Grasberg complex and staff, and fluctuating annual costs reaching $12 million for unarmed, in-house security costs.

On 23 March 2004, Rio Tinto announced it had sold its 11.9 percent shareholding in Freeport. Rio Tinto made a $518 million profit. Citing no environmental or social reasons, Rio Tinto's then chief executive Leigh Clifford reassured shareholders that "the sale of [Freeport] does not affect the terms of the joint venture nor the management of the Grasberg mine" and that through "our significant direct interest in Grasberg, we will continue to benefit from our relationship with Freeport".

Rio Tinto remained committed to the mining of Grasberg, and would continue overseeing its management through various operating and technical committees.

Alarmingly, as recently as 2008, fundamental human rights violations such as the "torture, excessive use of force and unlawful killings by police and security forces" have been confirmed by the United Nations Special Representative of the Secretary General on Human Rights Defenders, Amnesty International, and United Nations Committee against Torture.

"There is no alternative to our reliance on the Indonesian military and police", Freeport chairman James Moffett wrote to the New York Times in 2005. "The need for this security, the support provided for such security, and the procedures governing such support, as well as decisions regarding our relationships with the Indonesian government and its security institutions, are ordinary business activities."

Al Jazeera's Step Vaessen reports on the most recent dispute which has paralysed the Grasberg mine

Norway's stance on 'ordinary business activities'

Ordinary business activities got both Rio Tinto and Freeport blacklisted.

First, Freeport. In October 2005, the Norwegian government began five months of deliberations over the company's "extensive, long-term and irreversible" environmental damage at the Grasberg complex. Entering into dialogue with the company in December, the Norwegians found that Freeport's response gave little evidence otherwise. Instead, the company's response criticised the use of "outdated information or biased reports issued by non-governmental organisations that are anti-mining or have a political agenda". And so, in February 2006, Freeport became the first company that the Norwegians blacklisted for environmental reasons. Although public disclosures of investment decisions are rarely made public, the Norwegians released a detailed 32-page recommendation report after the shares were sold in June 2006.

Second, Rio Tinto. In December 2007, the Norwegians began eight months of deliberations over "severe environmental damage" resulting from the Freeport joint venture in West Papua.

And so, as with Freeport, the Norwegians made the decision to divest from Rio Tinto in February 2008 - due to the "unacceptable risk that the Fund, through continued ownership in the company, would contribute to ongoing and future severe environmental damage". Referring to the earlier Freeport report, in September 2008, the Norwegians published an additional 10-page recommendation report on the Rio Tinto sale.

For the Norwegians, it wasn't so much about what had been done in the past; it was what Rio Tinto and Freeport were going to do next.

Rio Tinto said that it was "surprised and disappointed" in the Norwegians' decision and that it had a "non-controlling" interest in the mine. Following years of signals from the international community, knowledge of the Freeport divestment in 2006, and months of dialogue over the matter, this is not so. As 12 per cent shareholders in Freeport between 1996 and 2004, Rio Tinto enjoyed proportional representation on the company's board as well as input through various operating and technical committees specific to Grasberg. For example, Rio Tinto's chief executive between 2000 until 2007 was also a director of Freeport betwene 2000 and 2004.

Curiously, a letter to the Norwegians from chief executive Tom Albanese claims that Rio Tinto had "not been asked by the Ministry to discuss its concerns prior to the sale". Citing the sustainable fashion in which Rio Tinto supplies diamonds and gold to Tiffany, Albanese reassured the Norwegians that the company makes a point of "carefully selecting our partners to be organisations with comparable standards to our own in environmental performance, as well as other areas such as community relations and human rights". A company with good governance wouldn't have gone into business with Freeport, let alone a business deal in which Suharto had a stake.

There has been some criticism of the Norwegians' divestment within the investment community. Much of it centres on four issues. First, ethical divestments remove the opportunity for dialogue to influence the practices of companies, especially when the sale represented only one per cent of Rio Tinto's value. Second, the decision contravenes investment theory. By reducing the number of companies in which to invest, one interferes with the efficient market and thereby constrains the financial returns available to it. Third, investors should focus on increasing shareholder value rather than adopting value-based positions - there are no sin stocks, only leaders and laggards. Fourth, the Norwegians are largely investing monies earned from the country's vast oil reserves, so how can they claim to be so ethical?

But in annual sustainable development reports, both Rio Tinto and Freeport position themselves as socially responsible businesses. Freeport considered itself a pioneer in recognising the land rights of the Amungme and Kamoro people, paving the way to compensation and dialogue since 1974 and an updated Memorandum of Understanding in 2000. Fourteen "invalid and unsubstantiated" land rights claims were made against the company globally in their 2008 report and that steps are being taken to process such claims better in future.

And we are told that Rio Tinto and Freeport set aside one per cent of net revenues from the Grasberg complex, which has enabled the indigenous Amungme and Kamoro people "to become equity participants in the mine" since 1996. But we find that the indigenous people are told, "the river upstream will largely recover naturally". The language of ethics has been hijacked such that what is claimed is not what is actually happening.

"Striving to be ethical is a noble achievement in itself, especially when lured with the financial fruits of rampant capitalism."

In June 2008, the Norwegians called for public input into the country's ethical guidelines. In his submission to the Norwegian government, pioneering shareholder activist Robert A G Monks sets the tone with the line: "There's a fine saying that one should not blame Columbus because he was not Magellan." Indeed, acting and striving to be ethical is a noble achievement in itself, especially when lured with the financial fruits of rampant capitalism.

The blacklisting of Rio Tinto is not an exemplar of capitalism. There are, to be sure, many equally compelling stories of what can go wrong when blinded by the relentless pursuit of wealth. But what the story of the Grasberg complex does teach us is that the global financial crisis was not caused by the limits of "extreme capitalism", as former Australian Prime Minister Kevin Rudd suggested his government could control, but the rampant and uncontrollable nature of capitalism itself. Nearly all of Australia's financial institutions invest in Rio Tinto, and the federal government's $60bn Future Fund does not make many any disclosures about its investments. The government decides what is a "good investment", and in the absence of transparency and accountability, Australians can only trust that what the government is doing is ethical.

Within days of the Norwegians' announcement, reports of homemade mortar bombs being fired at the gates of the Grasberg complex rippled through the world news media. For now, that was West Papua's response. Given that both Rio Tinto and Freeport have yet to reply adequately, we hope that the silence will be broken by other stakeholders who value what's important here: the Amungme and Kamoro people, who just wanted their land but are left with this "red river".

This is an extract of a chapter from the book, Evolutions in Sustainable Investing: Strategies, Funds and Thought Leadership, to be published by Wiley in December 2011.

NAJ Taylor is a PhD candidate in the School of Political Science and International Studies at the University of Queensland, and author of This Blog Harms.

ABOUT THE AUTHOR

N.A.J. Taylor is an honorary research fellow at La Trobe University's Centre for Dialogue, and a doctoral researcher in the School of Political Science and International Studies at the University of Queensland.